Here Comes a Housing Pitch

The major piece of unfinished business from the financial crisis of 2008 is housing finance and housing policy generally. The GSEs, under conservatorship since then, and long-standing problems in housing finance and the underlying market have been awaiting comprehensive reform. The relevant House and Senate Committees are at work. The administration seems on board. But nothing happens around here without Mitch.

Is housing reform finally at the must-pass stage for the Senate Majority Leader on par with nominating Trump judges and officials (and maybe lifting the debt limit)? And what is House Financial Services up to on this score? Read on.

Good weekends all..

Best,

Dana

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GSE Reform State of Play

Reportedly, Trump administration officials are confirming plans to enact reforms that would return the Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, to private ownership. For many, this might feel like GSE reform Groundhog Day.

Since the financial crisis, secondary mortgage market facilitators Fannie Mae and Freddie Mac have been under government conservatorship. Congress has made efforts over the past decade to release the GSEs from government control, but disagreements over other housing policies have continually scuttled negotiations.

In 2014, Sens. Tim Johnson and Mike Crapo put forward a GSE reform bill that advanced through the Senate Banking Committee, 13 votes to 9, with six Ds and seven Rs voting yes. Progressive Democrats were opposed, with Sen. Warren arguing that the bill would reduce the pool of qualified borrowers for Fannie and Freddie mortgages. Then-Majority Leader Reid believed the bill would split the Democratic Caucus, so it never came to the floor for a full vote.

Last Congress, then-Chair of House Financial Services, Jeb Hensarling, introduced a bipartisan proposal with Democratic Reps. John Delaney and Jim Himes. The hybrid proposal would have returned GSEs to private ownership, while directing mortgage guarantor and wholly-owned government corporation, Ginnie Mae, to take on some of the existing roles of the GSEs. It got a hearing late in the 115th Congress, but did not receive a markup, let alone a floor vote.

Whither the Crapo Proposal?

In early February this year, Senate Banking Committee Chair Crapo proposed a new version of his bill, The Housing Finance Reform and Taxpayer Protection Act of 2014. Instead of replacing Fannie Mae and Freddie Mac with a new Federal Mortgage Insurance Corporation (FMIC), as the 2014 bill stipulated, Crapo’s 2019 plan would turn Fannie and Freddie into private guarantors. Eligible mortgages would be securitized by Ginnie Mae.

Both the current proposal and the 2014 legislation establish a New Market Access Fund to address affordable housing issues. They also maintain that the federal government should play a role in ensuring a competitive, sustainable mortgage market to American consumers. Both plans also increase the role of private capital as one solution to the affordable housing crisis.

Although Senate Democrats have been a part of bipartisan efforts to reform GSEs in the past, they may face pressure from the new face of the party today. It is possible that Chairman Crapo and Ranking Member Brown negotiate something smaller, but with 2020 fast approaching, it seems unlikely.

Housing on the HFSC Agenda

In 2014, Rep. Maxine Waters unveiled the Housing Opportunities Move the Economy (HOME) Forward Act. The bill proposed ending Fannie and Freddie altogether and replacing them with a new lender-owned “Mortgage Securities Cooperative” that would be the single issuer of federally guaranteed mortgage-backed securities.

In July 2018, Rep. Waters announced that GSE reform would be a top priority for the House Financial Services Committee (HFSC) if Democrats took back the House. Since then, she has focused more on affordable housing. But with GSE reform purportedly moving in the administration and a proposal on the table in the Senate, Rep. Waters has an opportunity to set her own GSE reform agenda as chair of HFSC.

If At First You Don’t Succeed…

Sen. Crapo’s GSE reform proposal would be the 15th congressional attempt at GSE reform since the financial crisis. In theory, there should be room for a bargain, as similar proposals have achieved bipartisan support. Whether a deal will be made this Congress is an open question. With the Administration walking back its ‘imminent’ reform announcement earlier this year, but announcing its readiness to release a plan at the end of last month, it is unclear what role Trump’s government will play.

A White House-led plan would not be ideal. Not only would it likely forgo much of what House Democrats would try to leverage out of a Congressional deal, an executive-led effort would likely be rushed, creating potential market risk.

A Democratic administration could reverse any changes made by the current one, but Trump officials could set in motion changes that could be hard to undo. Will the Executive Branch finally take the GSE reform reins from Congress? For now, administration officials say they are putting “finishing touches” on a proposal.